A trust can make your estate plan live as a working entity. It can preserve assets for the benefit of a child or parent who needs income but hasn't the ability to manage investments. But if it's not well structured, a trust can break a fortune that has taken decades to earn.
In the broadest sense, a trust is a means of managing wealth for the benefit of one or several persons. Wealth can include financial assets, real estate or intellectual property like copyrights. A person can be an entity like a charitable foundation or a university or a hospital.
Lawyers and trust companies are the traditional experts on trusts. Trouble is, if you're thinking of establishing an inter vivos trust (meaning one that is in operation during the life of the person who creates the trust) for a child going to school in the United States or abroad, or a testamentary trust (one that goes into operation after the death of the trust's creator), the experts may charge heavy fees for their work.
The trust can split income for taxable persons, dividing income among elderly persons who cannot handle funds themselves. If the trust is irrevocable, that is, if the testator cannot unwind the trust and take the money back, then the income will be taxed in the hands of the elderly beneficiaries. If this kind of a trust is set up, the trust agreement should specify who gets the income or distribution of assets once the elderly beneficiaries have passed away. The effect is to put the gross income of the trust into two hands, first, the income beneficiaries who pay tax only on the income they receive and second, the trust itself, which must pay tax only on realized capital gains. The result is preservation of the trust's capital with tight control over income paid out.
A trust can also be established to prevent a spendthrift beneficiary from squandering money. If the trust is properly constructed, it can also reduce taxes on income distributed to the beneficiary. Later, the trust can provide for the needs of grandchildren and, once they have reached a specified age, the income can be used to support their parents in retirement.
A charitable remainder trust can provide for a donation to a charity but conserve assets so that the donor of the property receives income for life. The donor in this arrangement can receive a tax credit for the gift.
Foreign trusts can help put a child through school abroad, although the tax rules in these arrangements are adverse. Recent changes to federal law taint foreign trusts and make their distributions subject to taxes that would not have to be paid if the money were just given to the child directly by the parent. The assistance of expert counsel is essential in drafting these trusts.